Private equity has major role in asset sales

It was a means to raise revenues for governments that had been drained by heavy subsidisation of a rapidly growing population.

Rapid urbanisation and an inability to meet infrastructure needs at the rate of population growth have contributed to private sector participation in various industries and sectors.

There is significant potential for privatisation in the Middle East and North Africa (Mena) and international investors have expressed an interest in situations where private ownership is accompanied by a transfer of strategic control to the new investor.

The evidence shows that there is no shortage of funding for privatisation in the region, especially with the resources available in the Gulf. Attracting international and local investors has proven to be a powerful opportunity for raising capital and has brought managerial talent and technical expertise to the region.

Such private equity firms as Tuninvest, Atlas Investment Group, Capital Trust, Vivendi Universal and Abraaj Capital are a few noteworthy examples of such investors.

In July 1999, Vivendi Universal acquired a 35 per cent stake in Maroc Telecom for Dh23.3 billion, which is about $2.3 billion. The price was 15 per cent more than the minimum fixed by the valuation authority.

It highlighted the confidence that the Vivendi had in the potential of Maroc Telecom. The partnership allowed Maroc Telecom to launch its regional development in the region.

To date, a small proportion of the Mena privatisation portfolio has been completed, but a large number of transactions (mostly infrastructure related) are still in progress.

In recent times, private participation in infrastructure has gained prominence and accounts for approximately 75 per cent of transactions in progress, notably in telecoms, power and transportation.

Recent example

An example of a recent privatisation is that of the Saudi Telecom Co (STC). Since the corporatisation of STC in 1998, the Saudi telecom market has grown rapidly and is expected to grow even more as evidenced by the growth in the mobile subscriber base and the number of working lines by 706 per cent and 74 per cent respectively from 1998 to 2002.

In recognition of this future potential the kingdom initiated a telecom sector liberalisation with the objective of developing the sector in terms of coverage and network, stimulate investments in the sector, promote economic efficiency, withdraw the government's active engagement, and spread share ownership so as to expand the local capital market.

Since the implementation of the liberalisation, not only has Saudi Telecom's revenue increased by a compound annual growth rate of more than 15 per cent from 1998 to 2002, the company has also been able to provide added value to customers through tariff reductions and has been able to create numerous other business opportunities.

Due to all these advancements, the company was able to raise $4 billion (Dh14.69 billion) from an initial public offering (IPO) which was 3.5 times over-subscribed in early 2003, which made this IPO the biggest in Saudi Arabia in 20 years and also gave an indication that investors are confident of the company's future success.

Private equity has the potential to contribute significantly to the privatisation in the region. Governments, through privatisation, provide private equity firms with investment opportunities and act as a superb source of deal flow.

In return, private equity companies bring to the table what is commonly known as smart money by partnering with companies to provide capital and operational enhancement, assisting in value creation and supplementing management expertise.

The following case study will further highlight the significant role of private equity in privatisation in a developing economy.

Actis' ground-breaking investment in Punjab Tractors was India's first successful private equity-backed privatisation. The investment was made in July 2003 with an investment amount of $60 million (Dh220.39 million).

The company is a leading manufacturer of tractors, combines and forklifts, and is the flagship of the Swaraj Group. In 2002, the state government of Punjab decided to sell its last 23.5 per cent shareholding in the company by tender.

Actis' privatisation strategy had the merit of backing the current management team, as opposed to partnering with trade buyers that would have bought significant integration risks in an area in which there is little experience in India.

In July 2003, the strategy paid off with a successful bid, making this the first privatisation in India to be successfully backed by a private-equity player.

Since its acquisition by Actis, Punjab Tractors has grown, showing 20 per cent quarter on quarter growth in revenues and 26 per cent growth in profits. Commercial vehicle revenues grew by 26 per cent and profits by 30 per cent.

In the region, private equity as an asset class and the scope of privatisation is going to boom in the near future.

Successful private equity companies will benefit from privatisations as a valuable source of deal flow and will in turn be able to offer value added strategic and financial advice.

Abraaj Capital is finalising its investment in a company, which was recently privatised in the region. This investment, if completed, will mark the first privatisation in the region to be successfully backed by a private equity player and will set the path for future transactions.

Suha Najjar is a senior vice president at Abraaj Capital